We maintain BUY on Kimlun Corporation with an unchanged fair value (FV) of of RM1.17/share based on FY23F PE of 9x. This is in line with our benchmark for small-cap construction stocks. There is no FV adjustment for ESG based on our 3-star rating.
Kimlun was awarded a contract from Bayu Melati to provide main building works for 2 blocks of service apartments in Selangor. The contract value of RM237.6mil will last until Jan 2027.
We estimate the accretion to Kimlun’s gross profit (GP) to average at RM5mil per year (or 4% of FY23F group GP).
We make no changes to FY23F-25F earnings as the awards are within our replenishment assumption of RM680mil. Potential jobs that Kimlun may win include Pan Borneo Highway, Johor-Singapore Rapid Transit System, road upgrading works in Johor and affordable housing projects.
Looking ahead, we believe that Kimlun could benefit from the construction of MRT3, of which subcontracts are envisaged to be awarded in late-2023F.
Recall that in 2012 and 2016, Kimlun bagged sizeable supply contracts of RM524mil involving tunnel lining segments and segmental box girders for MRT1 and MRT2.
Risks include (i) weaker-than-expected recovery of job flows; (ii) eroding profit margins from rising costs; and (iii) shelving of mega projects.
We believe that the stock is currently undervalued, trading at FY23F PE of 5.5x, substantively below our 9x benchmark for small-cap construction stocks and offering decent dividend yields of 5%.
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